Important new changes to Inheritance Tax from 1 January 2022
Her Majesty’s Revenue & Customs (HMRC) have recently announced they will be changing the reporting requirements in respect of deceased persons’ estates.
Chartered Legal Executive Kat King discusses the changes that will take effect from 1st January 2022, and who will be affected by these changes. (She has since updated this article to cover additional changes for 2024/2025.)
First, it is important to highlight that these changes are good news. They will simplify Inheritance Tax (IHT) reporting requirements, and will apply to the estates of those who die on or after 1st January 2022.
Current Inheritance Tax legislation (before 1st January 2022)
If an estate is classified as low value or exempt, then in most cases an ‘IHT205 Return of estate information’ form needs to be completed and submitted to the
Probate Registry. If the allowance of the deceased person’s late spouse is being claimed, an ‘IHT217 Claim to transfer unused nil rate band for excepted estates’ form is also required.
The requirements for an estate to be classed as excepted are as follows: ● The estate is not subject to IHT, and the value of the estate is less than the Nil Rate Band Allowance (currently £325,000)
- On the death of the surviving spouse, the value of the estate is less than £650,000 (2x Nil Rate Band Allowance), when the allowance of the first spouse to die can be claimed
- The deceased left their whole estate, worth less than £1,000,000, to their spouse or civil partner, or to a charity
- If the deceased held assets in a trust, they would need to be worth less than £150,000 and only held in one trust
- If the deceased made lifetime gifts within seven years before they died, provided the total value of those gifts did not exceed £150,000 ● If the deceased person was a ‘foreign domiciliary’ (meaning they lived permanently outside of the UK), they died abroad and the value of their assets in the UK is under £150,000
For more complex estates that do not meet the criteria above for an excepted estate, or when IHT needs to be paid, a full ‘IHT400 Inheritance Tax Account’ form needs to be submitted to HMRC.
Inheritance Tax changes from 1st January 2022
From 1st January 2022, HMRC will reduce the number of Inheritance Tax forms that need to be completed and raise current limits. This means more estates will classify as excepted estates.
The new legislation includes the following changes:
- Completing IHT205 and IHT217 Inheritance Tax forms will no longer be required for all estates classed as excepted
- The spousal/civil partner/charity limit for an excepted estate will triple, so will increase from £1,000,000 to £3,000,000
- If the deceased held assets in a trust, the limit of the value of those assets being held will increase from £150,000 to £250,000 in one trust. ● If the deceased made lifetime gifts within seven years before they died, the total value that the gifts cannot exceed is being increased from £150,000 to £250,000
- The new rules remove the excepted estate status for ‘foreign domiciliary’. If a property was owned in the UK or lifetime gifts of UK assets were made in excess of £3,000 in any tax year within seven years before the foreign domiciliary died, the full IHT400 form will be required
What does this mean for me?
The estate of anyone who dies on or after 1st January 2022 will be affected by these changes if it is a low-value estate or exempt estate.
The increase in limits mentioned above will mean more estates are treated as excepted estates. As a result, the executor or administrator for the estate of a deceased person (Personal Representatives) will be required to complete fewer Inheritance Tax forms.
As the limits for excepted estates are being extended, in many cases the full ‘IHT400 Inheritance Tax Account’ submission (where no IHT is payable) will no longer be required.
Overall, this is great news. These changes will mean a lot of time and money can be saved when dealing with a deceased person’s estate, which will be a welcome relief to bereaved families.
Further Inheritance Tax changes for 2024/2025
The changes to IHT that went into effect on 1st January 2022 still apply in 2024, and will continue to do so in 2025. However, the Spring Budget 2024 announced some additional reforms to the tax regime.
Most of these changes are set to take place no earlier than 6th April 2025, with one exception.
As of 1st April 2024, personal representatives of estates will no longer need to have sought commercial loans to pay IHT before applying to obtain a ‘grant of credit’ from HMRC. This change is intended to ease the payment of IHT before probate or confirmation and make it easier for individuals and sole traders to meet their tax obligation.
Otherwise, the following changes have been proposed for ‘non-doms’ (UK residents whose permanent home is, for tax purposes, outside the UK). These are set to take place from 6th April 2025, subject to consultation:
- When a person has been a resident in the UK for 10 years, IHT will apply to their worldwide assets owned outright, regardless of domicile ● Conversely, when a person has been a non-resident for 10 years, they will no longer be subject to IHT on worldwide assets
- Foreign assets held in Trusts set up after 6th April 2025 will be taxable on the trustees if the settlor:
- Has been a resident in the UK for 10 years; or
- Has been a resident at some point in the last 10 years (having been taxable on worldwide assets)
On that final point, note that it is still possible for a non-domiciled settlor to set up an IHT-exempt excluded property Trust up until 6th April 2025.
The consultation for these IHT changes will have specific reference to:
- Transitional provisions
- The length of the residence criteria and tail provision
- Any connecting factors other than residence
- Gifts with reservation
- Domicile elections
- Formerly domiciled residents
- Calculation of Trust charges
However, it’s worth noting that a general election will occur before the changes to IHT mentioned in the Spring Budget 2024 are set to go into effect. If there is a change in ruling government, legislation may be amended or redrafted completely. As such, we cannot yet be certain of what changes may occur.
Discuss Inheritance Tax with an expert solicitor
If you have any questions about these changes to IHT, or wish to take this opportunity to get your estate in order, please contact Kat King on 01749 341805 or email kat.king@mogersdrewett.com. We are here to help.